Valuation and Law Coursework 2015 82%

Alexandra Hess 10527634
VALUATION AND LAW
MODULE BNV6050
STUDENT ID: 10527634
COURSE: REAL ESTATE
THIRD YEAR
Background:
Homer House is a block consisting of a row of shops on the ground floor and 10
flats on the upper floors. The flats are held on individual leases each with 68 years
unexpired. The ground rent of each flat is £50 per annum and the individual
market value of each flat with its existing lease is taken as £110,000.
The landlord proposes to carry out necessary repairs to the roof and the boiler
which provides the hot water and central heating to the individual properties. The
work is being done prior to the landlord putting his investment in the building on
the open market
The Task:
1) Explain the procedures the landlord must go through in respect of
recovering the service charge from the residential tenants
2) Explain to the residents of Homer House what their legal rights are to
acquire the freehold estate in the property
3) Prepare a valuation for the extension of one of the leases.

The aim of this assessment is to analyse the rights of long leaseholders and their
rights to compulsory purchase. I have been tasked with three questions to answer
in relation to Homer House (a block with shops on the ground floor and residential
flats above) in order to answer these questions accordingly, various case studies
have been read and research undertaken to provide a suitable answer. Certain
assumptions have also been made to answer these questions accordingly; all
assumptions are stated within the text.
Task 1: “Explain the procedures the landlord must go through in respect of
recovering the service charge from the residential tenants”
If any landlord, in particular that of Homer House, is unsure of the service charge
regulations; he should refer to the Landlord and Tenant Act 1985 as this sets out
the general rules for service charges, the requirements of them and the limitations
that can arise.
Service charges occur primarily when a building has multiple tenancies such as a
shopping centre or industrial estate however to answer this question
appropriately, service charges with regards to a residential block of flats will be
discussed. Section 18 (1) of the Landlord and Tenant Act 1985 explains the
meaning of service charge and relevant costs “(…) service charge means an
amount payable by a tenant of a dwelling as part of or in addition to the rent”.
Shapiro, Davies and Mackmin (2009) go on to further state, “Where a landlord
does retain the responsibility, they will normally seek to recover the costs
incurred form all of the tenants by means of a service charge”. This particular
definition is relevant as Homer House is a block of flats where the landlord
ultimately retains responsibility of the flats. The Lease Advisory Service (2013)
states that the aim of the service charge is to, “(…) recover the costs they incur in
providing services to a dwelling”. Service charges normally cover general
maintenance, maintenance of the common parts, structural repairs, employment
of staff such as caretakers and management whilst also relating to expenditure of
the day-to-day functioning of the building (Shapiro et all, 2009). Whilst a service
charge (in general) covers the above mentioned points, it is worth noting that
details of what can and cannot be charged by the landlord should be set out in the
lease.
The landlord of Homer House is proposing to carry out necessary repairs to the
roof and the boiler that provides the hot water and central heating to the
individual properties. In order for the landlord to recover the service charge from
the tenants he must follow a certain procedure. The first point of call is to refer to
the lease. As mentioned above and highlighted again by the Lease Advisory Service
(2010) “The lease will dictate the format of the charge” the lease should state what
is and isn’t covered by the service charge. As the works mentioned are general
repairs, it is highly likely that these works will be covered by the service charge. It
is also important to refer to the lease as it may state how the service charge is paid.
The Lease Advisory Services (2013) state “Most modern leases allow for the
landlord to collect charges in advance, repaying any surplus or collecting any
shortfall at the end of the year” however if the leases in a block do not provide

‘interim payments’ then a problem can arise for all parties. In theory the landlord
must buy all the services before he is reimbursed in the case that the particular
lease allows him to recover the interest then he would/should be able to afford
the costs and would not be out of pocket, however if the lease does not cover this
then the landlord must finance the services our of his pocket which may make him
reluctant to fulfil his repairing obligations in the future (Lease Advisory Services,
2013).
As discussed above, the landlord’s power and the leaseholders obligations are all
governed by what is stated in the lease. It is worth noting that “the lease is a
contract between the leaseholder and the landlord and there is no obligation to
pay anything other than what is provided for in the lease” (Lease Advisory Service,
2013) and that is why referring to the lease is something the landlord should do
before embarking in any repairs in case they are not covered. The lease must state
various points (other than what is covered) such as when the charge is payable
and recoverable, how often is it due (quarterly, annually etc) and whether it is a
fixed or variable service charge (we are assuming it is variable). It is being
assumed that for Homer House the clauses relating to services charges cover the
relevant repairs, as they are works of improvement and general maintenance
repairs. In the case of Tingdene Holiday Parks Limited v Cox [2011] the landlord
could not recover the costs incurred as it was stated that the works were ones of
improvement (a new children’s play area) rather than works of necessary repairs
and maintenance.
Once the landlord has referred to the lease and established that the repairs are
covered he should “(…) consult the tenants before spending any money on a
property (…) and that failure to comply with these requirements is a criminal
offence and the landlord may be fined up to £2,500 and will be restricted in the
amount of service charge that they can charge” (Landlord and Tenant Act 1987).
In the case of Beitov Properties Limited v Martin [2012] the service charges were
not payable by the tenant as the address for the landlord was deemed inadequate
as it was the agent’s address rather than the landlords.
It is also worth noting that (as it assumed that the tenants are paying variable
service charges) the landlord must consult the tenants before carrying out any
qualifying works. The landlord is required to do this under Section 20 LTA 1985;
it states that he/she must consult the tenants if they are required to contribute
more than £250. Section 20ZA (2) defined qualifying works as “works on a
building or other premises”. The importance of this can be seen in the case of
Martin v Maryland Estates Limited [1999] L&TR 541 where the landlord served the
notice but found that additional and more costly works were required which he
did without serving a further notice, he was refused the cost of the extra work.
The landlord should serve the tenants with a Section 20 notice identifying the
works that are to be carried out. All demands for service charges must be in
written form and must contain the landlords name and address (Landlord and
Tenant Act 1987, Section 47). We have assumed that the service charge is
demanded in advance however occasions may arise when the “demands are issues
after completion of the works or provision of the service. In these cases a statutory

time limit applies: the landlord must issue the demand within 18 months of his
incurring the cost” (Landlord and Tenant Act 1985, Section 20B, subsection 1). It
is worth noting “that subsection 1 will not apply if within the period of 18 months
beginning with the date when the relevant costs in questions were incurred, the
tenant was notified in writing that those costs had been incurred and that he
would subsequently be required under the terms of his lease to contribute to them
by the payment of a service charge” (Landlord and Tenant Act 1985, Section 20B,
subsection 2).
We have assumed that the landlord is recovering the service charge in advance; if
this is not the case then he will ultimately be recovering the service charge in
arrears. The case of Brent Borough Council v Shulem B Association Ltd [2011]
discussing the recovery of service charges in arrears. In summary, Brent Borough
Council owned five blocks of residential flats (like this of Homer House) and
Shulem B Association leased 15 flats within these blocks. The High Court ruled
that the landlord/freeholders letter notifying the tenants (Section 20) stated the
‘estimated’ costs rather than the ‘actual’ costs and therefore this did not constitute
a valid demand and that the landlord did not adhere to Section 20B. In this case
the landlord lost out on a sum of around £640,000. This case highlights the
importance of adhering to the time frame set out in Section 20 and how vital each
and every word of the lease and any relevant correspondence is.
Assuming that the landlord has followed the correct procedure and consulted the
tenants, it is important to note that the landlord is only entitled to recover the
costs of services and repairs that are deemed reasonable. The word reasonable is
what the landlord must take note of here; it is one of the most important
limitations of the service charge (Landlord and Tenant Act 1985, Section 19).
Leaseholders have “(….) powerful rights to challenge service charges they feel are
unreasonable at the First-tier Tribunal (Property Chambers)” (Lease Advisory
Services, 2013). Once the landlord of Homer House has contacted the tenants
regarding the impending works, it would be good practice to, if in any doubt, apply
to the Leasehold Valuation Tribunal (LVT) to determine whether what he thinks
is reasonable – actually is. The same applied to the tenants, if they disagree with
the costs they can apply to the LVT, which will provide a fair judgement.
The above states the relevant process that the landlord must follow and the
various traps that one can fall in to. It is vital that he is aware of the terms of the
lease as that will govern what is covered by the service charge. He/she must also
be aware of the time constraints and the word reasonableness. If there is any
doubt, the landlord should also refer to the Landlord and Tenant Act 1985, Section
19 (Limitation of service charge: reasonableness) and Section 20 Limitation of
service charges: consultation requirements. If these steps are not followed it can
be extremely costly to the landlord as he/she may not be able to recoup the money
spent.
References & Bibliography

 Brent Borough Council v Shulem B Association Ltd [2011] EWHC 1663 (Ch)
 Gilje & ors v Charlegrove Securities Ltd & anor [2003] All ER(D)162
 Hayward R (ed) (2008), Valuation Principles into Practice Routledge (London)
 Shapiro, E and Davies, K and Mackmin, D. (2009), Modern Methods of
Valuation. London: EG Books
 The Leasehold Advisory Service. (2013) Service Charges and other issues,
London
 The Leasehold Advisory Service. (2013) Living in Leasehold Flats, London
Task 2: Explain to the residents of Homer House what their legal rights are to
acquire the freehold estate in the property

The right of a tenant to acquire the freehold of a property is known as Collective
Enfranchisement. The Lease Advisory Service (2013) states “The Leasehold
Reform, Housing and Urban Development Act 1993 (as amended by the
Commonhold and Leasehold Reform Act 2002) gives tenants the right upon
qualification to compel the sale of the freehold of the building of part of the
building”.
Various assumptions have been made; firstly it is being assumed that it is the
tenants of Homer House wanting to buy as opposed to the landlord of Homer
House wanting to sell. If the landlord is proposing a sale of Homer House then he
must, under Part 1 of the Landlord and Tenant Act 1987 (as amended by the
Housing Act 1996), provide the tenants with first refusal. Secondly it is being
assumed that the tenants of Homer House are unhappy with the way their block
is being run and handled. The reason for this is that one of the common reasons
for CE is the fact that it would be beneficial for the tenants to buy the freehold as
it would give them control over the management of the block. As well as the before
mentioned advantage, gaining the freehold holds many more advantages for the
tenants, one mainly being the fact that they can grant themselves a lease extension
for virtually nothing. Acquiring the freehold also protects their ‘asset’ – property
– against time. A lease is commonly referred to as a wasting asset and as the
tenants have 68 year unexpired, it is wasting away therefore purchasing the
freehold protects them against time and retains value, Shapiro, Davies and
Mackmin, (2009).
There is a substantial amount of effort and work that has to take place for
Collective Enfranchisement (CE) to be successful. If the tenants of Homer House
are unsure of the process and right of CE then the following Acts shows be
consulted; Landlord and Tenant Act 1985, Landlord and Tenant Act 1987,
Leasehold Reform, Housing and Urban Development Act 1993 and the
Commonhold and Leasehold Reform Act 2002. The tenants of Homer House
should also refer to the Leasehold Advisory Website/Documentation as it states
the ‘basic outline of the process’ as below:
- Checking eligibility (of the building, the tenants etc)
- Organising for enfranchisement
- Choosing the Nominee Purchaser
- Selecting and instructing professional advisers (solicitors and surveyors)
- Assessing the purchase price
- Serving the Initial Notice
- Preparing for the subsequent procedures
Prior to any notices being served, the tenants of Homer House must make sure
that they are ‘qualifying tenants’, if they are not then they are not eligible to
acquire the freehold and the following process would be wasted. The ‘right to
collective enfranchisement’ is stated in Section 1 of the Leasehold Reform,
Housing and Urban Development Act 1993. Prior to checking that the tenants
qualify, one must check that the building qualifies; are there are lease two flats in
it? Are there at least two-third of the flats let to qualifying tenants? The answer to
the first, in the case of Homer House is yes and the second will be established

below. The Lease Advisory Website states that to be a qualifying tenant requires a
long lease, which is:
- a lease of a term of years in excess of 21 years; (qualification is governed
by the original term of the lease when first granted); (two thirds of all flats
in the building must be owned on a long lease, for Homer House this means
that at least 6.6667 say 7 tenants must have this however we have been told
that all tenants have individual leases each with 68 years unexpired)
- a shorter lease which contains a clause providing a right of perpetual
renewal;
- a lease terminable on death or marriage or an unknown date (including the
so-called 'Prince of Wales' clauses);
- the continuation of a long lease under the Local Government Housing Act
1989 following the expiry of the original term;
- a shared ownership lease where the tenant's share is 100%;
- A lease granted under the 'right to buy' or 'right to acquire on rent to
mortgage terms'.
does it pass the 25% non-residential rule?:   
If more than 25% of the internal floor area of the building, excluding any common
parts, is neither used or intended to be used for residential purposes then the
building will not qualify. This could be shops, offices etc. Please note garages
and parking spaces specifically used by flats in the building will be classed as
residential.
Certain criteria have been met, such as the 25% rule, the 2/3 rule and lease term
however due to the fact that certain facts were not given, we are assuming that the
tenants of Homer House meet every criteria set out above.
There is a formal process for Collective Enfranchisement that the tenants must
follow very closely and ensure the whole process adheres to the laws stated.
Assuming that the tenants of Home House are indeed qualifying tenants the first
stage is to serve an Information Notice (discretionary), Section 11 of the Leasehold
Reform, Housing and Urban Development Act 1993. The service of the Section 11
notice by the tenants of Homer House states that they have an interest in the
property and that they are requiring details of that particular interest – Homer
House. The landlord must respond with 28 days.
The tenants of Homer House must now organise the presence of a Nominee
Purchaser. A Nominee Purchaser is (and most commonly) a company, which has
been formed by the tenants to acquire the freehold. It is being assumed that the
tenants of Homer House have set up a company as Nominee Purchaser who will
become the new landlord if the CE is successful. It is also being assumed that the
tenants have instructed professional advisors. The company must be registered at
Companies House.
Now the participating tenants must serve an Initial Notice (served by the Nominee
Purchaser) on the Landlord; it then follows a ‘prescribed route’ (Lease Advisory
Website, 2013). Section 13 of the Leasehold Reform, Housing and Urban
Development Act 1993 sets out the requirements of the Initial Notice, in summary

it must include:
- details of the property to be acquired, including a plan
- a statement of the grounds on which it is claimed that the specific premises quality
for the right of CE on the relevant date
- details of any leasehold interests to be acquired
- the price proposed (the service of an Initial Notice also fixed the Valuation Date
as that particular date)
- the full names and addresses of all the qualifying tenants
- the name and address of the Nominee Purchaser
- the date by which the freeholders it to provide the Counter-Notice
The serving of an initial notice starts statutory proceedings for the acquisition of
the freehold and is therefore legally binding. The participating tenants are
individually liable for the landlords ‘reasonable’ costs from the date he receives
the notice (Leasehold Advisory Service, 2013). This therefore means that if there
any mistakes within the notice, it could be extremely costly to the tenants of
Homer House – hence why due consideration and thoughtfulness must be
undertaken by the tenants to ensure that every point is accurate. The importance
of this act and the vitality of the Initial Notice is to ensure that the tenants of Homer
House are fully aware of their obligations, what is expected of them and what they
are involved in. There have been cases that stipulate the pitfalls of the Initial
Notice and the Counter-Notice, recently and most notably the case of Cascades &
Quayside Limited v Cascades Freehold Limited [2007] which brought to light the
issue of the tenants’ signatures. The initial facts of this case are not uncommon
with CE, 174 flats in London. It was the organisation of the signatures of the
majority of the tenants, which was under scrutiny. A blank signature sheet was
sent to each tenants for signature, this was done in advance of the Initial Notice
and therefore the tenants were signing a sheet without having seen the notice.
Section 99 of the Leasehold Reform, Housing and Urban Development Act 1993
Act contains provisions governing the signing of Initial Notices. Subsection (5)
states:
“Any notice which is given under Chapter I or II by any tenants or tenant must
(a) if it is a notice given under section 13 or 42, be signed by each of the tenants,
or (as the case may be) by the tenant, by whom it is given; and
(b) in any other case, be signed by or on behalf of each of the tenants, or (as the
case may be) by or on behalf of the tenant, by whom it is given.”
This above Section was questioned, as it does not make clear the intention that the
Notice has to be served personally by each tenant as the words ‘on behalf of’ are
used. The landlord argued the case that the tenants had not signed the Initial
Notice itself, which is a requirement of the Act. The Court of Appeal agreed with
the landlord and deemed the Notice invalid. This case highlights the importance
of following the Law and Act step by step.
Once the Initial Notice has been served, the landlord of Homer House has a period
of 21 days to request information. To ensure that the tenants of Homer House
meet all time limits, it would be advisable to have a solicitor (professional advisor)

on ‘stand-by’ to meet any demands in a timely fashion. If the tenants do not have
a solicitor ready to meet any demands and the time limit passes then the Initial
Notice can be rendered useless and their application withdrawn (they cannot
apply for CE for a further 12 months). The landlord may not be obliged to sell the
freehold if it can be proven that he/she plans to demolish the flat and redevelop
as a whole or part of the building. This however only applies “where at least two-
thirds of all leases in the building are due to terminate within a period of five years
from the date of the service of the Initial Notice” (Lease Advisory, 2013). For the
purpose of this task it is being assumed that the landlord is not serving a counter
notice nor is he/she refusing the sale as each of the leases have at least 68 years
unexpired so the refusal is not valid.
It is being assumed that the tenants of Homer House have followed the correct
procedure (set out above) and that the landlord has not served a counter notice
and that Collective Enfranchisement is available.
 Sherwood, W (year unknown), Collective Freehold Enfranchisement Flowchart
[online], [accessed 1st
December 2014], Available from:
http://www.wslaw.co.uk/site/uploads/tinymce/files/Freehold_200112_v07.pdf
 The Leasehold Advisory Service. (2013) Collective Enfranchisement, Getting
Started, London
Task 3: Prepare a valuation for the extension of one of the leases.
In order to prepare a sound and processional valuation, certain assumptions have
been made which are stated in the annotations below the valuation (please refer
to the numbers relating to the specific text).

Value Landlords Current Interest
Total Ground Rent of £50 x 1 flats = £50 pa for the block
Value of the Term
Rent Received = £50 pa
YP 68 years @ 7% (1) = 14.14
= £707
Value the Reversion
Current value of the flats £110,000 x 1 = £110,000
10% (2) = £121,000
Value of Term = £707
Reversion = £121,000
PV £1 after 68 years @ 4.75% (3) = 0.043
Value on Reversion = £5,203 (£1,210,000 x 0.043)
Current Value = £5,910 (£52,030 + £7,070)
Value of the Landlords current
interest in the property = £5,910
Calculate Marriage Value
Improved value of flats = £121,000
Less
Present Value of Flats = £110,000
Less
Present Value F/H = £5,910
Marriage Value = £5,090
Current Value = £5,910
Marriage Value = £5,090
50 : 50 Split = £2,545 (£5,090 / 2)
Price = £8,455
Assumptions / Annotations
(1) 7%
7% is the interest rate applied to 68 years unexpired. The figure 14.14 is lifted
from Parry’s Valuation and Investment Tables.
(2) 10% uplift
At the end of the leases the Landlord can grant a new longer lease so there will an
uplift, 10% uplift is being applied as a fair uplift percentage.
(3) 4.75% - Deferment Rate
4.75% relates to the deferment rate which is the annual discount applied on a
compound basis to an anticipated future receipt to arrive at the market value of
the freehold at the valuation date (Shapiro et all, 2009). Deferment Rates (DR) are
one of the main focal points for arguments within negotiating collective
enfranchisement claims and lease extensions – such as the lease extension for
Homer House. There have been cases surrounding DR, namely the case of Cadogan
Estates v Sportelli [2006]. Up until the before mentioned case, DRs were at around

6% within the centre of London however there was uproar from freeholders as
they argued that the DR should be in accordance with yields on other sorts of
Investments. In September 2005, the Lands Tribunal addressed this in the case of
Arib v Cadogan when it ruled against the 6% DR and stated that “4.5% should be
the normal rate for houses and 4.75% for flats” (Adrenaline Media, 2007). The
4.75% DR has been set by the Lands Tribunal and therefore has been used within
the above example.
 Adrenaline Media (2007), The Real Cost of Sportelli for Landlords and
Leaseholders [online], [accessed 7th
December 2014], Available from:
http://www.newsontheblock.com/courts-and-case-law/2736/the-real-cost-of-
sportelli-for-landlords-and-leaseholders.thtml

Valuation and Law Coursework 2015 82%

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Viewers also liked

Viewers also liked (14)

Similar to Valuation and Law Coursework 2015 82%

Similar to Valuation and Law Coursework 2015 82% (20)

Valuation and Law Coursework 2015 82%